FIXED INCOME. Finding new strategies for uncertain markets

Transcription

1 FIXED INCOME Finding new strategies for uncertain markets

2 Three things to know about today s bond market 1 Declining interest rates have driven bond returns higher for more than 30 years At today s levels, interest rates can t get much lower 3 n 10-year U.S. Treasuries n Effective federal funds rate n Recession In general, bonds prices move in the opposite direction of interest rates, and for a long time that was good news for fixed-income investors. For the past three decades, longer-term interest rates have been trending lower, sending prices on existing bonds higher. But it s a trend that can t last forever, and when rates do rise, bond investors could discover that their portfolios contained more risk than they intended. 2 With today s low yields, rate increases could lead to big losses Because the income offered today in many bond market segments is so low, it could take years for coupon payments to make up for the capital losses bondholders could suffer due to rising rates. According to one study, in an average rising-rate scenario (where rates rise 3% over about three years), bondholders in the highest-rated securities could lose more than 22% of their bond OCT 1997 Asian currency crisis 1997 AUG SEP 1998 Long-Term Capital Management collapse 1998 MAR 2000 Tech bubble bursts DEC 1998 President Clinton impeached SEPT 2001 September 11 terrorist attacks DEC 2001, JUL 2002 Enron, WorldCom bankruptcies MAR MAY 2003 Iraq invasion AUG 2005 Hurricane Katrina DEC 2009 European sovereign debt crisis begins SEP NOV 2008 Lehman Brothers bankruptcy, QE MAR 2011 Tsunami hits Japan OCT 2010 QE2 AUG 2011 U.S. debt downgraded MAR 2012 Greece defaults MAY 2013 Fed s tapering comments SEP 2012 QE OCT 2014 QE purchases end DEC 2015 First Fed rate hike in nine years NOV 2016 Donald Trump elected president portfolios principal value during that period. 1 3 Stretching for income is a risky proposition Reaching for higher yields by investing in bonds with longer maturities or lower quality ratings only compounds the problem. Longer maturity bonds have a higher duration, 2 which measures sensitivity to interest-rate changes. The higher a portfolio s duration, the bigger the loss it would suffer in a rising-rate environment. Lower quality bonds, on the other hand, are more sensitive to economic changes and run a higher risk of default. Passive strategies have significant exposure to interest-rate risk n Duration (years) n Expected price change (%) if rates rise 3% Bloomberg Barclays U.S. Aggregate Bond Index year U.S. Treasuries Consider this: U.S. Federal Reserve balance sheet (in trillions) $0.93 $4.45 More than eight years after the end of the Great Recession, the Fed has begun normalizing monetary policy. The decision to increase short-term interest rates in December 2017 was the latest move by the U.S. Federal Reserve (Fed) to wind down its stimulative efforts, which had been in place since While the Fed still has trillions of dollars on its balance sheet from its quantitative easing programs, the message is clear: The era of easy money is coming to an end. The question for investors is how to prepare their portfolio for an environment of rising rates and less accommodative policy from the Fed. 1 When Bonds Fall: How Risky Are Bonds if Interest Rates Rise? Welton Investment Corporation, Duration measures the sensitivity of the price of bonds to a change in interest rates. 3 U.S. Department of the Treasury, Federal Reserve Bank of St. Louis, as of 12/31/17. For illustrative purposes only. The benchmark for short-term lending, the federal funds rate is periodically set by the Federal Reserve Board and reflects the interest rate banks charge each other for overnight loans. 4 Bloomberg, John Hancock Investments, as of 12/31/17. Source: U.S. Federal Reserve, as of 12/31/

3 Look beyond the mainstream for new opportunities Over the past 20 years, during the four longest periods of broadly rising interest rates, U.S. Treasuries and core U.S. bonds were among the worst performers. More specialized sectors, on the other hand, generally fared well, in part because they are less reliant on declining interest rates to fuel performance. Not all sectors of the bond market are dependent on declining rates to generate returns Growth of $100,000 through various interest-rate cycles Periods of rising rates are highlighted below $600, ,000 OCT 1998 MAY 2000 Fed funds rate +0.76% 10-year U.S. Treasuries +1.85% Emerging-market debt 19.58% 10-year U.S. Treasuries 3.12% JUN 2003 JUN 2007 Fed funds rate +3.99% 10-year U.S. Treasuries +1.66% High-yield bonds 9.86% 10-year U.S. Treasuries 0.75% JAN 2009 APR 2010 Fed funds rate +0.04% 10-year U.S. Treasuries +1.44% High-yield bonds 49.16% 10-year U.S. Treasuries 6.46% AUG 2012 DEC 2013 Fed funds rate 0.07% 10-year U.S. Treasuries +1.53% High-yield bonds 9.68% 10-year U.S. Treasuries 6.11% $585,268 Expand your fixed-income horizons Not only have sectors beyond the mainstream tended to outperform the broad-based Bloomberg Barclays U.S. Aggregate Bond Index in rising-rate environments, today they generally offer higher yields as well. High-yield bonds Debt issued by lower credit quality companies, typically less sensitive to interest rates and driven more by corporate fundamentals Floating-rate notes Interest payments on these bank loans made to corporations float along with interest rates, paying higher coupons as rates rise Emerging-market debt Annualized return during rising rates* Yield 6.52% 5.73% 6.24% 5.82% Consider this: Not all bond market sectors move in unison. When it comes to building a diversified portfolio, correlation is one of the most important gauges. Correlation measures how similar the performance of two investments has been over time. Adding investments with low or negative correlations to a portfolio makes it more likely to weather a variety of market conditions. 400,000 $417,543 Debt issued by governments and corporations within developing economies, often buttressed by strong demographic trends, such as growing consumer classes 6.09% 5.12% Correlation 10 years, as of 12/31/17 300,000 $287,414 $281,753 $280,064 $279,082 $261,493 Short-term credit Bonds with shorter maturities are less sensitive to rising rates since bondholders can expect to have their principal repaid relatively soon 4.29% 2.49% Floatingrate notes Bloomberg Barclays U.S. Agg Bond Index 10-year U.S. Treasuries ,000 Mortgage-backed securities Income payments to these bonds are derived from pools of mortgages, and as housing fundamentals improve, the risk of defaults tends to decrease 3.48% 2.91% High-yield bonds Emergingmarket debt Core U.S. bonds U.S. investment-grade bonds dominated by government securities whose returns are driven by rate movements 3.18% 2.71% Short-term credit Mortgagebacked securities , year U.S. Treasuries Core U.S. bonds , Some of the most heavily traded securities in the world, 10-year U.S. Treasuries are the de facto proxy for intermediate-term interest rates 3.75% 2.40% Source: Morningstar Direct, Stone Harbor Investment Partners, Western Asset Management Company, and Bloomberg, as of 12/31/17. Emerging-market debt is measured by the J.P. Morgan Emerging Markets Bond Index (EMBI) Global Diversified Index, which tracks U.S. dollar-denominated Brady bonds, loans, and Eurobonds of external debt instruments in the emerging markets. High-yield bonds are measured by The Intercontinental Exchange (ICE) Bank of America Merrill Lynch (BofA ML) U.S. High Yield Master II Index, which tracks the performance of globally issued, U.S. dollar-denominated high-yield bonds. Core U.S. bonds are represented by the Bloomberg Barclays U.S. Aggregate (Agg) Bond Index, which tracks the performance of U.S. investment-grade bonds in government, asset-backed, and corporate debt markets. Mortgage-backed securities are measured by the Bloomberg Barclays U.S. Mortgage-Backed Securities Index, an unmanaged index comprising 15- and 30- year fixed-rate securities backed by the mortgage pools of Ginnie Mae, Freddie Mac, and Fannie Mae. Floating-rate notes are measured by the S&P/LSTA Leveraged Loan Index, which tracks returns in the leveraged loan market and captures a broad cross section of the U.S. leveraged loan market, including dollar-denominated, U.S.-syndicated loans to overseas issuers and excluding those in default. Short-term credit is measured by the Bloomberg Barclays Credit 1 5 Year U.S. Index, which tracks the performance of U.S. government and international, U.S. dollar-denominated, investment-grade corporate bonds with maturities between one and five years. 10-year U.S. Treasuries are measured by the ICE BofA ML 10-year U.S. Treasury Index, a one-security index comprising the most recently issued 10-year U.S. Treasury note. The index is rebalanced monthly. In order to qualify for inclusion, a 10-year note must be auctioned on or before the third business day before the last business day of the month. It is not possible to invest directly in an index. Past performance does not guarantee future results. * The rising-rate periods included in the illustrations above are 9/30/98 5/31/00, 5/30/03 6/29/07, 12/31/08 4/30/10, and 7/31/12 12/31/13, four of the longest periods of broad interest-rate increases during the past 30 years. Source: Morningstar Direct, as of 12/31/17. Correlation is a statistical measure that describes how investments move in relation to each other, which ranges from 1.00 to The closer the number is to 1.00 or 1.00, the more closely the two investments are related. 4 5

4 Broadening your fixed-income portfolio can help you avoid concentrated risks Adding more types of fixed-income investments to your portfolio doesn t necessarily mean taking on more risk. In fact, in the example below, a broadly diversified bond portfolio generated more income and higher returns than an index-oriented portfolio over the past 10 years, and did so with less volatility. A diversified fixed-income portfolio produced higher returns with lower duration Performance results n Core U.S. bonds n Emerging-market debt n High-yield bonds n Mortgage-backed securities n Floating-rate notes n Short-term credit Traditional index-oriented portfolio Diversified bond portfolio Income generation 2.71% 3.56% Average duration (years) year annualized return 4.01% 5.00% Standard deviation (over three years) 2.81% 2.41% Ending value of $100,000 invested 10 years ago (rebalanced quarterly) 100% $148,100 $162,900 50% A range of fixed-income investment options John Hancock Investments offers a diverse lineup of fixed-income funds designed to help investors pursue a range of goals, from broad diversification to generating current income to protection from rising rates. Average annual total returns as of 12/31/17 1 (%) Expense ratios (%) John Hancock Bond Fund Ticker 1 year 5 year 10 year Life of fund 11/9/73 Gross Net (what you pay) Class I (without sales charge) JHBIX Class A (without sales charge) JHNBX Class A (with 4.0% sales charge) JHNBX John Hancock Emerging Markets Debt Fund 1/4/10 Class I (without sales charge) JMKIX Class A (without sales charge) JMKAX Class A (with 4.0% sales charge) JMKAX John Hancock Floating Rate Income Fund Managed by Western Asset Management Company 1/2/08 Class I (without sales charge) JFIIX Class A (without sales charge) JFIAX Class A (with 2.5% sales charge) JFIAX John Hancock Investment Grade Bond Fund 12/31/91 Class I (without sales charge) TIUSX Class A (without sales charge) TAUSX Class A (with 4.0% sales charge) TAUSX John Hancock Short Duration Credit Opportunities Fund Managed by Stone Harbor Investment Partners 11/2/09 Class I (without sales charge) JMBIX Class A (without sales charge) JMBAX Class A (with 2.5% sales charge) JMBAX John Hancock Strategic Income Opportunities Fund 4/28/06 Class I (without sales charge) JIPIX Class A (without sales charge) JIPAX Class A (with 4.0% sales charge) JIPAX Investment goals High-quality portfolio International exposure High-quality portfolio International exposure Source: Morningstar Direct, as of 12/31/17. This is for illustrative purposes only. Diversification does not guarantee a profit or eliminate the risk of a loss. Standard deviation is a statistical measure of the historic volatility of a portfolio. It measures the fluctuation of a fund s periodic returns from the mean or average. The larger the deviation, the larger the standard deviation and the higher the risk. Fixed-income investments are subject to interest-rate and credit risk; their value will normally decline as interest rates rise or if an issuer is unable or unwilling to make principal or interest payments. Investments in higher-yielding, lower-rated securities include a higher risk of default. Foreign investing, especially in emerging markets, has additional risks, such as currency and market volatility and political and social instability. Liquidity the extent to which a security may be sold or a derivative position closed without negatively affecting its market value, if at all may be impaired by reduced trading volume, heightened volatility, rising interest rates, and other market conditions. Currency transactions are affected by fluctuations in exchange rates. Frequent trading may increase fund transaction costs and increase taxable distributions. The use of hedging and derivatives could produce disproportionate gains or losses and may increase costs. A portfolio concentrated in one sector or that holds a limited number of securities may fluctuate more than a diversified portfolio. Loan participations and assignments involve additional risks, including credit, interest-rate, counterparty, liquidity, and lending risk. Mortgage- and asset-backed securities may be sensitive to changes in interest rates, and may be subject to early repayment and the market s perception of issuer creditworthiness. Fund distributions generally depend on income from underlying investments and may vary or cease altogether in the future. Please see the funds prospectuses for additional risks. This material is not intended to be, nor shall it be interpreted or construed as, a recommendation or providing advice, impartial or otherwise. John Hancock Investments and its representatives and affiliates may receive compensation derived from the sale of and/or from any investment made in its products and services. Ask your advisor Ask your financial advisor how fixed-income funds from John Hancock Investments can help you better position your portfolio for today s markets. 1 The inception date for John Hancock Bond Fund s oldest class of shares, Class A shares, is 11/9/73. Its Class I shares were first offered on 9/4/01. The inception date for John Hancock Investment Grade Bond Fund s oldest class of shares, Class A shares, is 12/31/91. Its Class I shares were first offered on 7/28/03. Returns prior to these dates for John Hancock Bond Fund and John Hancock Investment Grade Bond Fund are those of Class A shares and have not been adjusted for expenses; otherwise, returns would vary. The inception date for John Hancock Strategic Income Opportunities Fund s oldest class of shares, Class NAV shares, is 4/28/06. Its Class A and Class I shares were first offered on 1/4/10. Returns prior to this date are those of Class NAV shares and have not been adjusted for expenses; otherwise, returns would vary. 2 Represents the effect of a fee waiver and/or expense reimbursement through 12/31/18 for John Hancock Emerging Markets Debt Fund and John Hancock Strategic Income Opportunities Fund and 9/30/18 for John Hancock Investment Grade Bond Fund, and is subject to change. The past performance shown here reflects reinvested distributions and the beneficial effect of any expense reductions, and does not guarantee future results. Returns for periods shorter than one year are cumulative, and results for other share classes will vary. Shares will fluctuate in value and, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than the performance cited. For the most recent month-end performance, visit jhinvestments.com. 6 7

5 John Hancock Investments A trusted brand John Hancock Investments is a premier asset manager representing one of America s most trusted brands, with a heritage of financial stewardship dating back to Helping our shareholders pursue their financial goals is at the core of everything we do. It s why we support the role of professional financial advice and operate with the highest standards of conduct and integrity. A better way to invest We serve investors globally through a unique multimanager approach: We search the world to find proven portfolio teams with specialized expertise for every strategy we offer, then we apply robust investment oversight to ensure they continue to meet our uncompromising standards and serve the best interests of our shareholders. Results for investors Our unique approach to asset management enables us to provide a diverse set of investments backed by some of the world s best managers, along with strong risk-adjusted returns across asset classes. Request a prospectus or summary prospectus from your financial advisor, by visiting jhinvestments.com, or by calling us at The prospectus includes investment objectives, risks, fees, expenses, and other information that you should consider carefully before investing. Connect with John Hancock jhinvestmentsblog.com John Hancock Funds, LLC Member FINRA, SIPC 601 Congress Street Boston, MA jhinvestments.com NOT FDIC INSURED. MAY LOSE VALUE. NO BANK GUARANTEE. NOT INSURED BY ANY GOVERNMENT AGENCY. MF PIFIBR 2/18